IT companies pay double to take over digital services startups

no thumb

IT companies pay double to take over digital services startupsBig IT services companies such as Capgemini, Wipro and Accenture are offering higher revenue multiples to take over digital services startups in their bid to hit the market faster with a cloud-based service or a digital consulting.

In the past two to three years, these firms have offered up to two-and-a-half times value for buying out small firms with strengths in cloud, design thinking, specific healthcare services in the US, and digital consulting that helps businesses restructure operations and people using digital tech.

For instance, Wipro spent $500 million to acquire cloud solution expert Appirio whose revenue before the transaction stood at $196 million. Capgemini offered 400 million euros (roughly $495 million) to buy digital consulting firm LiquidHub, which reported revenues of 200 million euros .

Offering a significantly higher price for taking small yet niche companies on board can be attributed primarily to faster marketing and revenue contribution through digital technology-focused services and the competition to drive digital transformation faster through inorganic route.

“IT services firms get very competitive when they eye smaller firms which deliver specific expertise and IP (intellectual property) they believe they can scale and deliver to market,” said Phil Fersht, CEO at services research firm HfS Research.

“In many recent cases, the Indian heritage IT firms have competed directly with the likes of Accenture, IBM and Capgemini and have had to offer higher price points to make the deal more attractive than the traditional western providers,” he said.

An IT sector analyst with a Mumbai-based brokerage firm said ‘faster time to market’ is a key expectation when these companies take a small firm on board at high premium.

Even if the an Indian IT company is buying a digital firm at a premium, the analyst said, it has a clear impact towards shareholders’ value in two broad ways: scaling digital technology service offerings faster, and doing right use of the cash reserve.

In fact, in many occasions of offering a premium, the buying company is learnt to have factored in the new-age technology prospects, unlike traditional valuation process.

Fersht of HfS Research said that the strategy of acquiring firms with niche skills often worked differently. “For example, Wipro’s acquisition of Appirio gave the firm an immediate capability in crowdsourcing (TopCoder) and credibility in Workday acumen,” he said. But, in the case of Accenture buying Irish advertising firm Rothco, the main focus has been “added revenues from European clients”, Fersht said.

Source link

The author

Leave a Response